Economic Scene;Good news for the down and out, or are the data misleading?

By Peter Passell

Published: April 25, 1996

WHAT'S all this fuss about income inequality? Sure, the richer are richer and the poor are eating Doritos. But not to worry, says W. Michael Cox and Richard Alm, researchers at the Federal Reserve Bank of Dallas: Most Americans struggling to make ends meet are on the fast track to affluence.

They found that just 5 percent of a sample of Americans in the bottom fifth of the income distribution in 1975 were still there 16 years later. Meanwhile, 29 percent of them had managed to grab the brass ring, ending up in the top fifth. And "between opportunity and equality," they remind, "it's opportunity that matters most."

The Cox-Alm study, published in the Dallas Federal Reserve's 1995 annual report, is making big waves among the movers and shakers of the political right. Indeed, after a ringing endorsement from the editorial page of The Wall Street Journal, it has become required reading for conservatives impatient with the current hand-wringing over the alleged plight of the young and immobile.

But a close look at the new research is not confidence-building. Indeed, even a casual look suggests that something -- actually, many things -- are amiss. "Cox and Alm ask the wrong question and give a misleading answer to the question they ask," argues Peter Gottschalk, an economist at Boston College and co-author of "America Unequal" (Russell Sage Foundation).

Standard measures of income distribution amount to snapshots at a moment in time. The large and growing variations between those at the top and bottom that have been reported by the Census are, of course, cause for disquiet. But liberals and conservatives generally agree that mobility matters, too. And without exception, studies that track the fortunes of individuals or families for many years suggest that lifetime income is distributed far more equally than income in any single year.

The Cox-Alm study is in this tradition. It follows 3,725 individuals ages 16 and over who remained part of the University of Michigan's Panel Survey on Income Dynamics for a 16-year period. And their conclusions are nothing short of remarkable. Of those in the bottom fifth in 1975, 95 percent were earning enough money in 1991 to have jumped in the rankings. Poverty in the 1975 snapshot was apparently no impediment to future economic success. The average income of individuals in the bottom fifth rose by $25,322, even after adjustment for inflation.

Mr. Gottschalk, however, notes that the Dallas researchers use unconventional means to reach these astonishing ends. For one thing, they measure incomes actually earned by individuals, rather than assigning individuals some prorated share of family income. As a result, the average earnings of the bottom fifth in 1975 was just $1,153 -- far less than anyone could actually live on.

Who, then, were these people? Probably not the poorest individuals, but the ones who worked only briefly in 1975. Mr. Gottschalk guesses most of them were part-time workers with marginal links to the formal labor force: students with after-school jobs, housewives who worked at the post office in the Christmas rush, and so forth.

Sixteen years later their average incomes had risen a fantastic 23-fold, to $26,475. To Mr. Gottschalk, this suggests that virtually all the former high school and college students in the sample had full-time jobs in 1991, as did most of the mothers whose children had grown up. "I'd be surprised if my teen-ager, who now earns pocket money delivering newspapers, doesn't do equally well," he allowed.

Mr. Gottschalk says, too, that by tracking individuals over time the Cox-Alm study mingles the impact of real economic mobility with income gains linked to accumulating work experience. It should hardly be surprising that 35-year-old carpenters make more than they did when they were 19-year-old carpenters.

What does all this add up to? "We have long known that mobility partially offsets the impact of inequality," says Van Doorn Ooms, director of research at the Committee for Economic Development. "It's still unclear by how much."

One answer that probably better represents the mainstream in economic research comes from Moshe Buchinsky and Jennifer Hunt of Yale University. In a paper published this year by the National Bureau of Economic Research, they estimated that averaging family incomes over a four-year period reduced measured inequality by about one-fourth. But they also found that the rate of economic mobility -- the probability of moving from one-fifth of the income distribution to another in any given year -- had actually fallen since 1980.

"Maybe it would make sense to spend less time splitting hairs over what's happened -- and more trying to figure out what can be done for the losers," Mr. Ooms concludes.